Senate committee approves bill to place new teachers in 401(k) retirement plans

New school employees would be placed in a 401(k) and prohibited from accessing a retirement plan that more closely resembles a traditional pension under controversial legislation narrowly approved Wednesday by a state Senate committee.

The proposal drew opposition from the state's Office of Retirement Services, as well as Democrats and teacher unions, who likened it to an attack on public education.

The groups say the measure does nothing to address a $26.7 billion unfunded liability carried by Michigan's school retirement system, and will instead cost the state billions to transition to a new system. The nonpartisan Senate Fiscal Agency estimates the switch would cost between $1.6-$3.8 billion over the next five years.

"Experts from retirement services have all come up and said how bad this bill is, how bad it is for the state, how bad it is for teachers, how bad it is for our schools, how bad it is for our budget - short term and long term," said Sen. Curtis Hertel, Jr., D-East Lansing.

"It will take money out of the classroom, not solve the problem, will end up costing us more."

The legislation - which now moves to the full Senate for approval - would extend only to school employees hired on or after July 1, 2017. New school employees have been placed in a hybrid pension/401(k)-type plan since mid-2010.

In committee, the legislation was approved 9-8, with three Republicans -- Goeff Hansen, Marty Knollenberg and Mike Nofs -- joining five Democrats in voting against the measure.

Republicans argue the proposal is needed because it protects taxpayers and prevents the unfunded liability from growing further.

This legislation "modernizes our system and protects the future of our retirement system," said Sen. Dave Hildenbrand, R-Lowell.

Sen. Phil Pavlov, R-St. Clair, said the legislation will help reduce a "massive" unfunded liability for "the people that work hard in our classrooms ever day."

Over 30 years, the switch to a 401(k) system is expected to cost between $28-$33 billion - $9 billion of which would fall on local school districts, the analysis shows.

Under the legislation, four percent of an employee's salary would be placed into a 401(k) plan with schools providing a 3 percent match. An amendment was approved where that 3 percent match would be covered by the school aid fund.

"It will cost more money and put more pressure on classrooms," said Kerrie Vanden Bosch, Director of the state's Office of Retirement Services, which opposes the legislation.

However, proponents of the change say the change will help reduce state costs in the future.

"We need to do something to close the system so that we're not going to continue to rack up these unfunded liabilities," said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy, a free market think tank that has long advocated for MPSERS reform.

In addition to concerns over costs, Democrats questioned whether closing off the current hybrid pension-401(k) system would result in new teachers seeking employment in other states or going into another profession.

"Why would anyone want to stay in this profession when they are constantly attacked," Hertel said.

Peter Spadafore, associate executive director for government relations for the Michigan Association of School Administrators, said Michigan's current hybrid system is "working well" and likened the legislation to a "solution in search of a problem."

Julie Rowe, of the American Federation of Teachers Michigan, said she opposes the bills because they are just "another attempt to distract from Michigan's real problems."